The Distinction Between a Payday Loan and an Advance
Did you realize that a payday loan and a payday advance are completely unrelated? Although the two are frequently confused, it's crucial to understand their distinctions. The former can be excellent for your financial future, while the latter must be completely avoided. Look at this more closely.
Let's look into payday loans first. These high-interest, short-term loans are made available by payday and cash advance lenders. Typically, they cost $500 or less.
Typically, payday loans must be repaid between 14 to 30 days. The borrower must consent to a hefty interest rate to acquire the loan. The Consumer Financial Protection Bureau (CFPB) states that these loans typically charge $10 to $30 for every $100 borrowed, which is a hefty fee.
Payday loans are relatively simple to obtain, but there are several significant disadvantages:
- High rate of interest
- Require credit verification
- Possibility of harm to your credit record
- The potential to fall into a cycle of taking out short-term, high-interest loans
The CFPB and other organizations have cautioned against utilizing payday loans due to these problems. These loans have interest rates that can easily spiral out of control for the borrower, reaching as high as 900%.
Frequent use of payday loans over time may result in a debt cycle. You might not be able to repay the loan when it's owing due to bills and other expenses. Your paychecks don't provide any relief, and your debt only grows.
Payday loans and payday advances are completely separate contractual arrangements. An employee benefit known as a payday advance allows you to borrow money from your paycheck ahead of time.
Unambiguously, a payday loan is not a debt. The fee to borrow the funds is normally a very small administrative cost, and your company doesn't charge interest. Payday loans are meant to aid workers in getting through difficult times. They can ask their employer for assistance rather than plunging themselves into debt. In an emergency, it's a wise financial decision.
A Scenario Comparing Payday Advances Versus Payday Loans
Let's examine an instance where you might compare a payday loan to an employer-provided payday advance. Maybe you need to spend $3,000 on a costly plumbing repair for your house.
If you applied for a payday loan from a cash advance lender, you would normally pay $520 in fees for a $3,000 loan - and that's assuming you were approved. Payday lenders seldom offer high-value loans unless you have outstanding credit and a sizable upcoming paycheck.
In comparison, you would likely pay a $75 fee for instant access to $3,000 if you requested a cash advance from your employer. You may pay a fee of less than $10 if the loan amount was higher in the range of $300. Some employers give you free access to minor loans.
Payday loans are also provided by employers out of sympathy for those who are having a hard time making ends meet. More than 70% of American employees struggle to make ends meet and would struggle to pay for an unexpected $400 or more bill.